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Saturday, October 22, 2011

Being given a fish versus fishing

It is much less the complex EU-structures which lead to the current crisis situation than the lack of competence and leadership on the part of EU-elites. Just look at Jean-Claude Juncker. As Head of the Eurogroup, he is the closest equivalent of the US Secretary of the Treasury. Before every meeting and as soon as he gets out of his car, he looks where the journalists are. And then he tells them things which may be the opposite of what he told them the last time; the opposite of what ECB-bankers have said; etc. etc. This public bickering of the last 3 years has done incredible damage to market confidence.

These incompetent but arrogant EU-elites have known it all better from the start of the crisis. Remember that at first they didn’t even want to hear of the IMF because they could handle the situation on their own just as well? People like Bill Rhodes have admitted in interviews that they had offered to share their experiences from Latin America but were politely sent off with the argument that the EU is different from emerging countries. Oh really? Aren’t external payment problems of countries the same all over the world?

This started out as a very simple problem. A member country of the Eurozone (accounting for about 3% of the Eurozone’s GNP) had created a mess until 2008 and could no longer handle its payment obligations. The most natural thing in the world would have been for the EU to tell Greece to sit down with her creditors and to negotiate possible solutions (rescheduling). The EU would not have gotten involved publicly, stating: “You know, this is first of all a problem between you and your creditors. Once you have worked out a proposal but still need help, we come in at the end and help where we can”.

Instead, the EU jumped forward and declared this as a crisis of the Euro and of the EU. This was as though the US government, the next time California can’t pay her bills, would jump forward and project the end of the American Union and the US dollar. If they do that loudly and consistently enough, markets will begin to believe it!

And then the EU-elites achieved a historical “first”: before private lenders could even be gotten involved, the EU stepped forward and used tax payers’ money to bail out those lenders. Well, once you start with that precedent, it is almost impossible to ever get out of it again.

Whenever there are financing problems, there has to be a negotiating team on each side: the borrower is represented by management and the lenders form a Steering Committee.

To this date, no negotiation team has been officially announced on the part of Greece’s lenders or on the part of the EU! The banks more or less withdrew from the scene and considered it as a gift from heaven that governments would step forward and make themselves the owners of the problems of banks. And the Greek government did not object that the EU would make itself the owner of the Greek problem.

Greece is responsible for the mess which she created up to 2008. For the much greater mess which has developed since then, the EU and their incompetent leaders are responsible.

Top representatives of the EU, of governments and of Central Banks created the impression that a “rescheduling” and a “haircut” are the same thing and they used the term “haircut” as though it were an everyday expression in the world of finance. Unless one wants to radically change the history of sovereign finance, a haircut for a country of the 1st world (and as a EU-member, Greece IS a country of the 1st world) after only 3 years of crisis must be considered as an absolute no-no! Instead, the country’s economy must be reformed so that it can become creditworthy again within 10-20 years.

If Greece can only service half of her debt right now, the solution is not a haircut of the other half but, instead, to reschedule the other half out to 30 years (or more) and capitalize the interest. This has the same economic effect as a haircut but the lenders do not have to “throw their claims away too quickly” (but they have to make provisions for possible losses right away).

It is no help to Greece at all when one sends her money so that Greece can return that money to her lenders. That is generally referred to as a bank bail-out. Bank bail-out’s should be handled directly with banks and not via Greece. The Greek problem is one of turning her present corrupt and crony-driven zombie-economy into a market-driven and value-generating economy. That literally requires development aid from the EU in the form of advice and it will require at least a generation of Greeks until it is complete. But first positive results would show up quickly.

“Give a hungry person a fish and he will eat once”, the Chinese proverb says. “Teach him how to fish and he will eat for the rest of his life”. So far, the EU has given Greece fish. It is high time that the EU helps the Greek economy to learn how to support their people.

1 comment:

Instead, the EU jumped forward and declared this as a crisis of the Euro and of the EU. This was as though the US government, the next time California can’t pay her bills, would jump forward and project the end of the American Union and the US dollar.

That was an excellent observation. One couldn't highlight the ridiculousness of the current political course any further.

According to http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP, a comparison to Ohio and Virginia would be even more accurate (they probably do not have California's financial troubles, though).